Are extra pension contributions maybe not such a savvy move after all?

[Snickersnack1]

Just read another post on mumsnet about potential increases to the state pension age. I then googled it, and it does seem quite likely that, being in my 30s now with a state pension age of 68 already, it’s likely to be 70+ by the time I actually retire.

I have a public sector work pension (LGPS) and I have been merrily paying into a shared cost AVC, thinking I was being smart about my future.

My workplace pension and AVC fund are linked to state pension age though! And there is no way I want to be working until I’m 70.

Maybe I would be better off paying into stocks and shares ISA rather than a pension, so I can have access to my money when I need it (ie 60, which is the age I have been vaguely and naively been imagining as my retirement age). Thoughts?

I'm not confusing anything with anything.

Have a quick Google, most DB schemes reduce your pension amount by 4% for every year you take it early (excluding the lump sum).

So taking your DB pension 10 years early, yeah you'll get an income for longer but it could be up to 40% lower per year than if you waited until retirement age.

It's why saving for retirement should be a mixture of assets, savings, investments and pensions.

It's common sense if you take a pension earlier you'll get less per year, maybe "received wisdom" was too confusing for you.

I would have thought the same. It doesn’t make sense that you have to wait until pension age; but I am not an expert.

Yes of course it will be reduced for early payment - but you will draw it for longer, so that doesn't mean you get less money overall (in fact the reduction rates are usually set to try and make it the same).

So I can't see why you're saying it's a bad idea if it's right for your circumstances? (eg especially if you are in bad health etc and may not live a long time)

Get yourself a SIPP also - you get tax relief with those too.

My wife is on an average earnings DB pension. Her starting salary was about £16k 13 years ago. Her FTE salary is now something like £32k and she is mid 30s. This will only increase over the next 30ish years she is in employment.

You tend to earn more as your experience and skill set develop, hence why your later years in employment will drag that average payout up.

But if you retire 10 years earlier you lose the highest 10 years of earnings. So you'll take a hit on drawing down early, as well as lose those higher 10 years for calculating your average.

Anyone that has reduced their hours or taken time off for children should consider that impact as well.

Hope this clarifies.

I understand what you’re saying - if you’re still in work then drawing pension later not only means you don’t get an early retirement reduction but you also get the chance to earn extra years and have a higher salary applied. I do agree with this.

But I continue to challenge your comment “received wisdom is not to draw DB pensions early”. I think it’s a very individual decision, and I would encourage people to think about their own circumstances rather than just use a rule of thumb - in particular if people already have enough pension earned they may value more time in retirement, and someone in ill health may be unable to work longer, or may have no time to enjoy their pension if they leave retirement too late. So one size doesn’t fit all.

You will be able to take AVC from minimum pension age which is shortly about to rise to 57 and you can take your DB early but with an actuarial reduction circa 4% for every year you take early

So aside from the 4% per year reduction, lower average earnings and having to live off much less for longer, you think it's not good advice for a healthy working age adult to continue contributing to a pension for as long as they can?

Your comment about ill health and circumstances apply to everyone, in every scenario regarding pension planning.

Some people can't physically work beyond a certain age. But the OP has not said that, have they?

Had they said they are struggling with health, should I draw down my DB pension early my advice would have been completely different.

So yes, received wisdom in the absence of ill health or other factors such as looking after an elderly relative IS NOT TO DRAW DOWN A DB PENSION EARLY.

This is a very interesting thread with lots of useful information thank you!

Regarding taking DB benefits early, I agree it's not necessarily 'received wisdom ' not to take it early. Lots of interesting discussion on money saving expert pensions forum with different perspectives.

Eg. You may want to take the DB pension early when you are actually retiring from that work, because when you retire you get a less punitive rate than if you left your DB job and did something else (or nothing) and a few years later decided to take it.

Similarly, once you take it you could invest it and that might work out well. However, if you retired from active service but didn't take your pension, it may grow at a reduced rate. Eg when you are in the teacher's pension scheme (career average) it grows by CPI plus 1.6. but when you leave active service, it only grows by CPI.

Additionally, you may choose to take the DB pension early and preserve some of your DC SIPP or AVCs. This is because if you died, you can pass it on to your inheritors. Whereas depending on the DB scheme, only a proportion will go to your spouse.

So I believe it is not that clear cut which is the best option. It depends on the scheme, doing some sums, how you feel etc etc. plus terms and conditions can change the closer you get to retirement age. Can you go down to part time etc.

In any event, saving extra into any pension scheme is probably better than not doing anything. I personally would do SIPP but also open LISA before the window closes. Also fine to do AVCs. Also ok to pay extra into main DB scheme. Buying extra DB pension is probably fairly expensive but you never know if you might need to claim ill health retirement and then it could be a life saver. So keep your options open and keep paying in.

"So yes, received wisdom in the absence of ill health or other factors such as looking after an elderly relative IS NOT TO DRAW DOWN A DB PENSION EARLY."

So what you're saying is "if you don't have a good reason to draw it early don't draw it early".

Hurrah. That's fine. That is sound advice.

That is not the same as what you first said i.e. received wisdom is not to draw it early at all.

If your LGPS pension was taken out after 2014 you must take the AVCs at the same time as your pension. So you can't chose to take the AVCs at age 57 for example and delay taking your main pension. But the AVCs can be taken as your 25% tax free amount against the nominal value of your main pension ( 20x the yearly accrued pension). So if you want to draw down early, consider this. I have an LGPS pension and AVC 'pot' , I'm contributing up to what the 25% of the total nominal pension 'pot' is estimated to be when I want to retire (60). Once I've achieved that value (ish because even if I stop contributing there will be growth in my AVC), then I plan to switch contributions to a SIPP which can be drawn down from age 57 (currently). My plan is to retire at 60 using the SIPP, then when that runs out (say age 63-64) drawn down my defined benefit pension and AVC and take the hit for early withdrawal on the defined benefit pension (current age I can access without penalty is 68).

I would suggest paying the standard amount into your government pension, anything you're paying 40% tax on into a SIPP (preferably via salary sacrifice, but I doubt think that's likely), £4k into a Lifetime ISA and anything extra into a Stocks and Shares ISA.

"I think most received wisdom is not to draw down DB pensions early though."

Where is the "at all" part you have added?

You seem to be inferring meaning to suit your argument. Especially since we've clarified the issue around individual circumstances. So not only have you misunderstood, you've continued to push a hypothetical set of circumstances that do not apply to the OP.

Yes my advice is sound, the only person that seems to have a problem with it is you.

I'm in the LGPS and I can choose to start taking it at 55 if I want. It won't be as much as if I take it at 67, but I can start drawing form before state pension age. Are you sure you can't?

My DB pension (USS) has a standard retirement age matching the current pension age, but you can opt to retire any time after 60 but with some reduction in benefits. Includes tax free lump sum.

Actually the minimum age for USS may be 55 as @IbizaToTheNorfolkBroadssays, can see no reason why it would be different from LGPS.

I'd go for a SIPP. I was in LGPS and used their AVC scheme but it was salary sacrifice. Without the salary sacrifice the flexibility of the SIPP is a huge advantage. I retired at 57 and had to take the AVCs at the same time as the DB scheme.

The advantage of the avc is the salary sacrifice, which means you save tax and NI.

a sipp only has tax savings.

fairly sure most pension schemes run seminars on how to maximise pensions and when to take them, worth going to if you can.

I don't think this is correct. At least for civil service pensions the website says

Will I pay National Insurance on my AVC contributions?

Yes, you will pay National Insurance (NI) contributions at the standard rate.

How old are you?

I suggest booking a meeting with someone from your pension fund.

I have two LGPS pensions as I changed jobs and didnt link them and as a result had a retained right to retire at 60

Ah ok. It is for mine. We pay AVC’s then ni and tax is on the remainder.

it may depend on your local scheme. Worth checking.

tbh I think if you under 35 pensions overall are a terrible solution Yes you get free money from employer but you prb cant access until you 70-75

Invest in an isa with index funds and you can withdraw an amount to retire once you reach enough in the isa